A feature of the credit crunch era has been like an episode of Hammer House of Horror. This has been the march of the Zombie banks where a burst into normal life is always promised but never seems to actually arrive. More than a decade later in some cases we find ourselves observing them still being on the march. Apart from problems which this raises for shareholders there are three big issues from this. The first is economies which are tilted towards the preservation of what in Lord of The Rings style we have named “The Precious” which we can see in two ways. One is economic policy which the European Central Bank is demonstrating by responding to the Euro area economic slow down with yet another banking subsidy called the TLTRO. The other is the way that bank profits are privatised and losses socialised by the way that the UK still has some £555 billion of gross debt and £305 billion of net debt on its books from the bank bailouts. Third is the effect of Zombification itself as described by the Bank for International Settlements last September.
Using firm-level data on listed firms in 14 advanced economies, we document a ratcheting-up in the prevalence of zombies since the late 1980s. Our analysis suggests that this increase is linked to reduced financial pressure, which in turn seems to reflect in part the effects of lower interest rates. We further find that zombies weigh on economic performance because they are less productive and because their presence lowers investment in and employment at more productive firms.
It is of note they think this has been going on for over 30 years although as the central bankers bank they may well be trying to deflect us from the growth of banking zombies over the past decade.
Two clear cases of zombiefication have been Royal Bank of Scotland and Deutsche Bank and the last 24 hours has brought a flurry of news on both. So let us start with my old employer which is the main bank in Germany.
Here is the BBC from yesterday explaining things which we knew all along.
Deutsche Bank and Commerzbank have abandoned merger talks, saying the deal would have been too risky.
Both banks said the deal would not have generated “sufficient benefits” to offset the costs of the deal.
The German banks only entered formal merger talks last month.
The German government had been supporting the tie-up, with reports saying Finance Minister Olaf Sholz wanted a national champion in the banking industry.
It is interesting how Too Big To Fail or TBTF is now apparently being a “national champion” isn’t it?
Combined, the banks would have controlled one fifth of Germany’s High Street banking business with €1.8 trillion ($2tn; £1.6tn) of assets, such as loans and investments.
The real issue all along was not the assets but the liabilities especially at Deutsche Bank! Anyway perhaps someone at the BBC has a sense of humour.
The deal was seen as a way of reviving the fortunes of both banks.
If we bring ourselves forward in time to this morning then the story has moved on.
Net revenue at its sprawling global investment bank, which accounts for more than half the German bank’s overall revenue and which relies heavily on its bond trading earnings, fell 13 percent to 3.3 billion euros (£2.8 billion).
The German flagship lender posted a net profit of 201 million euros, up 68 percent from a year ago but hardly making up for a net loss of 409 million euros in the fourth quarter as the bank battles stiff competition from U.S. powerhouses. (Reuters).
The share price has responded with a nearly 3% fall to 7.27 Euros. This continues the trend of the last year where it has lost 38% and beyond that because if my chart is any guide the pre credit crunch peak was over 94 Euros. The response on social media to me pointing out these matters has varied from that is 7.27 Euros too high to this from Nicholas Dubois.
Because in my eyes, the market is emotionally driven at the moment in DB, not seeing through the fundamentals – why was the stock up more than 5% yesterday and 10% higher from here ? Noise. CET1@13.7%, VaR only 27m (!) – chance of a lifetime.
How many chances of a lifetime have we had now to invest in banks? As a punt at a low price this can work as for example the Greek banks have shown recently but as a long-term investment you only get poorer.
Again the news started yesterday. From Sky News.
Royal Bank of Scotland (RBS) boss Ross McEwan has quit, saying the time is right to leave as it is in a “much stronger financial position”.
The news was announced ahead of the bank’s annual general meeting in Edinburgh – five-and-a half years after he took over the reins of the part-nationalised lender. ( Sky News)
Somewhat irreverently I suggested that he was clearing the decks so he could apply to be Governor of the Bank of England. Although this from Simon Jack highlights that the reality is of a rather odd sort of resignation.
He is staying till 2020. 12 month notice period
That is rather different to my days in the City of London where if they could not persuade you to change your mind you got sent home with your belongings in a black bin liner.
As to his tenure there are clear issues because RBS is still mostly owned by the taxpayer and whilst it does now have profits here is its own statement from earlier.
RBS reported an operating profit before tax of £1,013 million, compared with £1,213 million in Q1 2018 primarily reflecting £265 million lower income, partially offset by £73 million lower operating expenses. Q1 2019 attributable profit of £707 million compared with £808 million in Q1 2018.
Up is the new down again, or something like that. We get a deeper perspective from the share price which has fallen 11 pence today as I type this to 239 pence. UK taxpayers of a nervous disposition might like to sit down before reading the next bit.
still way below the 502p the Labour government paid for them at the height of the crisis. ( Sky News)
Here is the Daily Telegraph from those days back in 2008 and the Chancellor was Alistair Darling.
The Chancellor said the taxpayer would not lose out.
“The taxpayers’ interest is being protected,” he said.
“I’m very clear that in return for all this, the taxpayer has got to see some upside. In relation to lending to small businesses, in relation to mortgages… that’s important too.”
The official story about the banks has sung along with Carly Simon.
I know nothing stays the same
But if you’re willing to play the game
It’s coming around again
They are always about to turn the corner on what turns out to be a Roman road. Also I note the mention of small business lending from a decade ago which has also been a grim theme. Those who have followed my updates on that issue will now that the promises here have required this to believe them.
Are you drunk enough?
Not to judge what I’m doin’ ( Calvin Harris and Sam Smith)
The subject reconvened in the summer of 2012 when the Bank of England claimed it was supporting the area but in fact reverted to type and pumped up mortgage lending by giving the banks yet another subsidy. Meanwhile lending to small and medium-sized businesses has required the use of the establishment’s ultimate admission of failure the use of the word “counterfactual”
I fear that Deutsche Bank is even worse because it has pretty much carried on regardless with the stories about past losses on derivatives never going away. Or to put it another way if big investors really believed they are just an illusion or imagination the share price would be nowhere near here. Now we face another slow down with the banks still singing along with Lyndsey Buckingham.
I should run on the double
I think I’m in trouble,
I think I’m in trouble.
It all comes down to the fact that the socialisation of losses helped to stop a change in behaviour as for so many the party mostly just carried on. The scandals of what it did to smaller businesses and the 2008 rights issue show that the law of the land often turns its blind eye to the banks as well.